My Q2 Preview: 20% Revenue Growth w 100% EBITDA Growth…On a cool, calm and rainy day in Southwestern Ontario was a good day as any to put my Q2 predictions on the record especially as I have felt I have been on the ball on this story the last year.
Lets Dive in;
Revenue
TARGET: $22.0 - 22.5M: On the upper range that is 20% revenue growth, who saw that just four Qs ago, there are a couple key growth drivers I will address.
1. Revenue Mix – Greg has done a good job a rationalizing sku offering and focusing more on higher margin products with more of a recurring revenue model especially on the respiratory side of the business. You can start to see that in gross margins as well in past Q1. Have to Look no further than the KPI data provided with Respiratory Resupply Setups have been growing at or above 20% YoY for the last 5 Qs. The holy grail will still be lifecycle management of the equipment and life extension. They ever get that solved and cashflow will explode higher.
2. Acquisition Kicker – Both the Central Oxygen and Riverside Medical acquisitions were made right before Christmas given we are looking at Q2 here this will be the first Q where both these acquisitions will show up in revenue. Small in size but accretive in nature.
3. Currency – This is a 100% US business that reports in CAD Dollars, if you look at the exchange rate for Q2 passed on avg the rate was 1.33 USD/CAD relative to 1.28 USD/CAD in 2018. That close to 4% delta adds an incremental $750K to the top line.
4. Internal Staffing – Q1 Conference call was very telling when discussing the doubling of sales staff. That is not something you do if you don’t expect to see growth. Greg & Hardik have laid out a plan to double the market growth rate of 3 – 5% which results in a core organic growth target of 8 -10%.
5. Fleeting Competition – This one surprises me a bit still, you are still seeing ripples through the industry from the 2015 reimbursement cuts with many smaller players going out of business or leaving the industry. Protech has the size and balance sheet capacity now to come in and take those market share gains and come in and as a buyer on the acquisition side and pick up if nothing else the equipment and customer relationships for under 1x Revenue.
Just one point on Bern Dizzle in the states grandstanding on the Medicare for all. Protech has a much better payor mix then Viemed and its peer group. As well these companies are trying to save the system money by keeping people out of the hospital. Low hanging fruit is the drugs and middle men taking a cut. Unless you put all your faith in Modern Monetary Theory I don’t think you should be losing much sleep as the larger players will be the one to survive and push further consolidation.
Personally, I think they are very conservative on that guidance number, especially given the sales force ramp. Could be at a $100M revenue run rate before the end of the summer. Especially one the recent acquisition closes.
Profitability
TARGET: $4.5M : Think I could be a little conservative here using a base 20% EBITDA margin when their new process and billings that Hardik has instituted continue to bring the bad debt figure down. On the margin pressure side there could be a little pressure from increased sales staff but that should just be timing issue for a Q or 2 as their wages hit the income statement before the incremental sales generated takes a Q or 2 to hit the income statement. Couple points here;
1. Viemed Margin Delta – I will hit this one again as they are putting up 25% margins and Protech is still recovering in the 20% range. Given the comparability of these two businesses especially as Protech gets more into the respiratory business there is no reason they cant bring it up.
2. Inventory Management – sku mix and reducing friction points by setting up centralized inventory locations is a direct tail wind to margins. Utilizing technology to increase productivity is not only for large companies, this has been talked about for over a year now. Scale is everything here as it has been addressed that once they hit a $100M revenue run rate that this is when we will really see the margin expansion. Well, I got news… we are essentially there.
3. Bad Debt – Has to be watched diligently, lets take a look last 5 Qs since the transition as a percentage of sales; Q1 – 15.72%, Q2 – 12.66%, Q3 – 6.00% Q4 – (6.23)%, Q1 – 6.19%. Keep that number <10% and I will be happy.
Margin expansion has been critical to the turnaround here, crazy thing I still think there is another 500 basis of points of margin expansion we could see without having to make any crazy assumptions. That would bring a EBITDA figure from 4.5M to over 5.6M+. You annualize and put a multiple on that… look out, that 3.00/share price the analyst has on it comes into view.
On Valuation
Given we are more half way through the fiscal year it’s time to roll forward the valuation to the 2020 fiscal year.
For Fiscal 2020 I am at $106.5M in Revenue and $23.5M in EBITDA (22% Margin).
Given that Protech will be put up greater EBITDA growth per share and their margins are almost recovered to an equal point there is no reason Protech trades at half the valuation as Viemd.
If I use a 8.0 – 10.0x EBITDA multiple on Fiscal 2020 EBITDA on a 88M share count I get to a target range of 2.15 – 2.65/share or 2.40/share at the midpoint which equates to 150% upside from Thursdays close.
In Conclusion, Protech has never had a more visible path to put up significant EBITDA growth alongside double digit revenue growth. It is a more derisked/cheaper story to buy today at 0.95/share then it was last year at 0.60/share.
Having the ability to recognize when the fundamental story has accelerated faster then the stock price and pay up is always one of the toughest things to do but is quite rewarding, especially in small cap land. Look out if the market cap gets over 100M as it will open up the investor base much wider.
Added twice this past week in the 0.95 – 0.98/share range and now fully loaded into the Q2 print.
You will want to be LONG for it… just my opinion.
LONG